July review

Gold edged up in July, aided by  higher tariff-led inflation expectations but a stronger US dollar proved a drag

Looking forward

A gap between prices and COMEX positioning is likely to be filled by rising net longs, not falling prices, as we view fundamentals to be supportive of the former

Gold drags itself higher

Gold prices edged up 0.3% to finish July at US$3,299/oz. A stronger US dollar contributed to positive returns in all major currencies. Year-to-date, gold remains up 26% (Table 1).

Our Gold Return Attribution Model (GRAM) suggests a positive contribution from a rise in inflation expectations and tariff tensions via our geopolitical risk metric (both Risk and Uncertainty factors). Momentum factors also contributed positively, while a stronger US dollar proved a heavy drag on returns in July (Chart 1).

Gold ETF inflows of US$3.2bn (23t) were split almost equally between North America (US$1.4bn, 12t) and Europe (US$1.8bn, 11t), while Asia slightly increased (US$0.1bn, 0.8t) and other gold ETFs (-US$0.1bn, -1t) experienced mild outflows. COMEX managed money net longs continued to build positions following the April trough.

Positioning revisited

The meaningful gap between COMEX positioning and the gold price, caused largely by tariff fears, is likely to be closed by positioning rising not prices falling, in our view

This is supported by key fundamentals, including: a weaker US dollar and real rate trajectories, alongside elevated market and geopolitical risks

Despite a disconnect between real rates and the gold price, COMEX investors have not disconnected and the relationship is likely to strengthen if yields drop.

Jaws wide open

With recent attention focused firmly on central banks, gold ETFs and Chinese investors, we thought it worthwhile to revisit what the so-called ‘fast money’ positioning on COMEX is telling us. One would think that given where gold prices are, investors would be loaded to the gills. We know this not to be the case as a share of overall portfolios, but it doesn’t appear to be the case in absolute terms either managed money shows net longs, typically representing hedge funds and larger financial institutions (dark blue line). These positions are above average, but it’s still a bit surprising they’re not higher—especially considering where gold prices are right now.

It can probably be pinned on an unwind of the tariff-fear trades in early 2025, and perhaps a bit of profit-taking. The stark sell-off in futures began well before the intraday spot priced peaked at the end of April. Looked at through a z-score lens1—so relative to recent trading ranges—this was a sharp capitulation (light blue dotted line).

Gas left in the tank

COMEX futures investors have recovered some of this lost ground, but this reset leaves us with the view that they have capacity to rebuild positions – a sentiment echoed for ETF investors in our Mid-Year Outlook.

One proviso is that fundamentals support that buying, and we think they do: A structurally weaker US dollar is one key factor and is backed by a strong case and consensus view,2 notwithstanding a possible near-term short squeeze given how crowded the trade is3

Added to that, risk perception remains elevated. Despite the current lull, the markets could be jolted by implied bond volatility or a resurgence of policy and geopolitical tensions (Chart 3)

Lower policy rates should also be a catalyst. But does that also mean lower bond yields, particularly real ones – the bit that’s empirically more important for gold? and if they haven’t mattered on the way up, will they really matter on the way down?

We care a lot

This decoupling of gold prices from inflation-linked bond yields (TIPs) is well documented by now with central banks, emerging market investors and a sprinkling of term premium the likely culprits.

But US futures investors have not decoupled from real yields, they still care. Yes, their sensitivity might be a little lower, likely due to term premia, but it’s still highly significant

Rates are probably already restrictive, so if the front end eases, the long end might follow suit. The weak labour market data in early August is edging us towards this outcome. This could also happen mechanically if lower policy rates stoke longer-term inflation fears, something that swap rates are currently hinting at (Chart 6).

In summary… Notwithstanding the risks we laid out in our Mid-Year Outlook and in What’s a bear case for gold?, if rates ease, risks linger, and the dollar stays soft, we could see managed money step back in with more conviction, particularly following the weak US labour market data in early August. This would support further flows into gold ETFs and could aid gold prices now that central banks have tailed off a bit. It’s not a done deal, but the pieces are lining up.